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The Importance Of Credit Scores

Feb 4, 2008
We hear so much about improving and repairing your credit score, but why? Why are credit scores such a big deal? How do they affect our financial decisions and lives?

These are questions that everyone should know the answer to. It is important to understand how credit scores work to understand how you can qualify for your next loan.

Everyone has a credit report. This report is put together with information regarding your finances. It shows all of the accounts you use and how well you manage your money.

It also shows the bills you pay, and how you pay them. This means that your credit report will show every late payment you have ever made. It entails all of your credit history, from your first savings account to the most recent car payment you made.

Your credit record isn't the only thing that comes from your credit history. Your credit score, or that three digit number, is derived from your credit history as well. This number, ranging from 350 to 800, also shows how well you manage loaned money.

Most people realize that buying things now and paying for them later is a privilege. Even the smallest credit card charge is considered a loan. Your credit card company is loaning you money now, and expects to be paid at a later date.

Your small repayment plans will show bigger lenders how well you can handle borrowed money. Let's say you are applying for a mortgage loan. You already have a car loan and you are pretty good about making your payments, just sometimes they are late and once you totally forgot until they sent you a notice.

This does not register well with lenders. If they are going to loan you money for your future home they want to be sure that you are going to make the payments every month and pay them on time as well.

Your credit score or rating is one of the most important factors to qualifying for a loan, along with your income and your debt to income ratio. Be aware that your credit score not only affects you borrowing power, but your interest rate as well.

You see all of those low interest rate credit cards and mortgage loan rates, but you have to remember that those are reserved for those with the best credit rating. In most situations, the better your credit, the better your interest rate. Though your rate could only be a few points above the best rate, you could pay a lot more in interest over the next 15 or 30 years of you mortgage loan.

If you are looking to increase your credit score to help you qualify for that upcoming loan, here are a few tips to help you along your way. The first is to always make your payments and pay your bills on time. The second tip is, if you can afford to, pay more than just the minimum payment on credit cards, car loans, and personal loans.
About the Author
Court provides internet marketing tips and is an expert on starting a blog.
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